Subject businessman has registered said vehicle at TAXI and thereby, must have paid higher road taxes to state Govt.. And hence, before claiming such arrangements as colorable devise / camouflage etc. to deny ITC, one will need more evidences.
Only because tax-payer is getting substantial tax-benefit which is NOT allowed to other businesses (i.e. other than 3 listed supplies under Section 17(a)) cannot be sole reason to deny such ITC.
And, hence, one cannot directly apply classic formulations like McDowell case on their face values to deny ITC and something more will be needed (For example: Non-genuineness of transport of passenger business) for courts to deny subject ITC for applying these classical formulations.
If said transport of passenger business is indeed genuine (i.e. not some artificial / colorable devise used for tax-evasion) and tax-payer can demonstrate the same, ITC cannot be denied for the reason that he got substantial tax-benefit in form of ITC.
In this regard, one must also note that SC ruling in case of VODAFONE INTERNATIONAL HOLDINGS BV. VERSUS UNION OF INDIA & ANR. (2012 (1) TMI 52 - SUPREME COURT), specially the followings:
"64. The majority judgment in McDowell held that “tax planning may be legitimate provided it is within the framework of law” (para 45). In the latter part of para 45, it held that “colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods”. It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with para 46 where the majority holds “on this aspect one of us, Chinnappa Reddy, J. has proposed a separate opinion with which we agree”. The words “this aspect” express the majority’s agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to “legitimate avoidance of tax liability” (paras 7-10, 17 & 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the “Westminster” and tax avoidance – these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.
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117. Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. Revenue’s stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, calls for no reconsideration by a larger branch."
These are ex facie views of mine and the same should not be construed as professional advice / suggestion.
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